Employer-paid health care: Whose money is it?

A couple of weeks ago the Kaiser Family Foundation released the results of its annual employer health benefits survey. Aaron summarized it and journalists wrote about it. The main story line was that employers shifted a lot of cost to employees, through higher employee shares of premiums and increased cost sharing. A few comments on this blog and some e-mail I received suggested that at least some folks understand the true story. Employees actually pay for every dollar of premiums, whether it’s listed on their pay stub not. So, the “shifting” of premiums from employer to employee is a fiction. Enter the time machine and go back to a post I wrote in January:

In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra

estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.

Since health insurance premiums are plausibly a factor of five or so less than wages (annualized), the 10% increase in the former leading to a 2.3% decrease of the latter is close to a one-to-one trade-off. But we don’t have to take just Baicker’s and Chandra’s word for it. Others cite similar findings. In a 2008 article in JAMA (link to a full access, low resolution version) Ezekiel Emanuel (yes that one) and Victor Fuchs write that “the health care cost–wage trade-off is confirmed by many economic studies.” [Reference list omitted; see original post] Clearly the notion that premiums and wages offset one another has an impressive pedigree.

Hardly anybody gets this. Most people think that the only thing they pay for is their share of the premium and their out-of-pocket costs (deductibles, copays, and the like). Lamentable as factual misunderstandings may be, this is actually a helpful one as far as consumer directed health plans (CDHPs) are concerned. I’ll explain in another post later today.

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